Good days ahead for green bond mkt

Volumes expected to double from last year's $37 billion

With climate change issues pushing investors toward clean projects, green bond volumes this year are expected to double globally from last year’s $37 billion. This year, China and India also debuted in this niche fundraising segment. India’s YES Bank and Export-Import Bank successfully issued green bonds, while China’s debut green bond issuance came from Xinjiang Goldwind Science & Technology Co. Ltd, an energy solutions provider.

According to Henry Shilling, senior vice-pres-ident at Moody’s Investors Service, so far, most green bonds have been sold by issuers in Europe and the US. This is because environmental policies in these two regions are more advanced than in developing countries. The need to finance projects supporting greenhouse gas emission reduction targets also plays a part.

“Some of these countries are starting to make the transition towards more environmentally sustainable economies, which could offer good opportunities for future green bond growth. We expect to see an increasing range of issuer credit profiles, maturities, currencies and bond features as the market grows,” Shilling added.

Shilling points out to a Chinese central bank report released in April that estimates that in the next five years, the ‘green sectors’ in that country will invest an equivalent of three per cent of GDP (RMB 2 trillion or $323 billion) annually.

Green bonds were pioneered by the European Investment Bank in 2007 with the issuance of a five-year €600-million Aaa rated offering. The World Bank (International Bank for Reconstruction and Development) followed in 2008 as part of its Strategic Framework for Development and Climate Change. The product was designed in partnership with Skandinaviska Enskilda Banken.

In India, YES Bank issued the first-ever green infrastructure bonds on February 16, 2015, for Rs 500 crore plus an option to raise an equivalent amount. The issue witnessed strong demand from leading investors — insurance companies, pension and provident funds, foreign portfolio investors, new pension schemes and mutual funds, according to a YES Bank spokesperson. On August 5, 2015, YES Bank again raised Rs 315 crore through the issue of green infrastructure bonds to International Finance Corporation (IFC) on a private placement basis. The 10-year tenor bond is the first investment by IFC in an emerging market green bond issue.

The spokes-person says there are many ‘green’ focused funds and multilateral financing entities globally, with specific mandates of investing in green bonds or lending to green projects. But the market for green bonds is quite nascent in India. “Given the government’s focus on renewable energy and 175 Gw of additional solar capacity installation by 2022, and the challenges around conventional lending, there is a need for innovative financing structures which could impart flexibility on tenors, lower the cost of funding, etc.”

Green bond is one such specialised avenue to provide for such financing. But there are no incentives associated with these issuances for either the issuers or the investors, apart from the fact that they come under the Reserve Bank of India’s infra-bonds category and therefore do not attract statutory requirements such as cash reserve ratio and statutory lending rate. YES Bank plans to use the proceeds for funding infrastructure projects in the renewable and clean energy space. These projects involve power generation from sources such as wind, solar, biomass, hydropower, etc. It has roped in KPMG to provide the assurance services annually, on the use of proceeds in accordance with the green bond principles. 

Shilling says from a legal perspective, there is, at this time, no apparent enforcement mechanism, such as a step- up in interest rates, repayment acceleration, or the equivalent of a default, in the event that the proceeds are not invested as promised, or in the event that the expected environmental benefits do not materialise. This, however, could change in the future. 

“The adoption of a voluntary set of best practice process guidelines in the form of Green Bond Principles (BGP) has helped to safeguard the integrity of the green bond market by standardising the definition of a green bond and emphasising the principles of disclosure as well as transparency. The guidelines, which were updated at the end of March 2015, consist of four components: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.” 

Besides, in much the same way as risk disclosures and transparency initiatives worldwide serve to enhance investor/creditor ability to assess credit worthiness, robust disclosure and transparency practices around individual transactions that also facilitate consistency and improved comparability across borders and industries are considerations that are likely to advance the growth and development of green bonds in India and elsewhere. 

The maturing of market would also require increase in both supply and demand for green bonds. “While, so far, green bonds in India have only been issued by lenders, we expect that as the market matures, we will see corporate green bonds, as well as project green bonds. New structures, products for credit enhancements would play a key role in development of corporate and project green bonds,” says the Yes Bank spokesperson.